Watchdog plans more stress tests

Central counterparties (CCPs) need to show regulators clearer, tougher stress tests, the Bank of England’s David Bailey said yesterday.

The Bank is finalising its stress tests of the banking system, and now wants to use the examinations more broadly across the system.

“There is no requirement for CCPs to disclose the details of the stress tests which they use,” Bailey told the Deutsche Boerse Group.

“It may be difficult for participants to fully compare the level of stress that CCPs can withstand.”

The stress tests examine how CCPs will be hit by an economic crash.

CCPs have been given an increasingly important role – regu­lators want derivatives contracts to be standardised, so they are easier to value and to clear up if a bank collapses. The derivatives are then traded and settled centrally, making it easier for regulators to see who owns what. But it also means CCPs are more important and so have to become more resilient to any market shocks.

Bailey suggested standardised stress tests should be used on CCPs, like those for banks.